A few weeks ago, I wrote 2 posts on how to accumulate sufficient cash down to buy a property. Since the recent credit crunch, banks are getting more difficult in regards to accepting mortgage loan applications. And Since they are afraid, they might not take the time to look at the bigger picture. This post is obviously for people who know how to control their budget and that they are in full control of their personal finance. Please take note that we are not telling you to do what is following, we are simply telling you that it is being done and how to do it.
The RRSP Loan Switchback technique
The technique is simple. If you are young, making a good income but didn’t have time to build up your cash down and you still want your mortgage right away; this is for you. Under the Home Buyer’s Plan (HBP), the Canadian government allow first time home buyers to withdraw money from their RRSP up to 20K per person in order to purchase their property. You have 15 years (plus 2 years of grace period without payments) to put your RRSP money back.
You don’t have enough RRSP investments yet? There is a solution! Let say that your marginal tax rate is 38% and you have 20K in RRSP unused contribution. If you plan on buying a property within the next six months, here is how you can do it: you take an RRSP loan for 20k with a differed payment option in 6 months (interest will still run since the date of the disbursement but your first payment will be in 6 months only).
Around May or June, you should receive a tax return of 7,6K (38% of 20K). Then, you use your tax return as cash down for your mortgage. If you are a couple, you will be able to put 15,2K as cash down for your mortgage. With the 5% cash down rule, you can go up to a property of 300K (if you qualify for such mortgage!).
You may use this money as extra cash down in addition to what you accumulated so far and put 20% cash down on your property. Therefore, you would avoid CMHC insurance premium.
What about the 40K RRSP loan? Are we not increasing our debts?
Not really. In fact, when you purchase your property, you are allowed to withdraw money from your RRSP (once withdrawn, you are not forced to use it as cash down). Then, you pay off your RRSP loans. The only cost of this technique will be the interest charged on the loan between the moment you contracted the loan and you pay it back.
The advantage of this technique:
– You get your property faster
– Since you buy your home now, you avoid the risk of seeing the same house value increasing by 10% by the time you accumulate your cash down.
– You will be forced to reimburse your RRSP contribution which is a good thing for retirement planning.
– May avoid CMHC insurance premium.
The disadvantage of this technique:
– You have to pay interest on a 40k loan for a few months
– Since you are forced to reimburse the 40k in your RRSP over 15 years, which makes additional payment of $2,700 a year ($225 a month) over the next 15 years.
– You better make sure you are qualified for a mortgage and that you want to buy a house. If not, you will be stuck with the payment of 2 20K RRSP loans.
Overall, this is not a bad technique, however, there are definitely pros and cons and it doesn’t suit everybody’s financial situation.
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